DEALBOOK; In Insider and Enron Cases, Balancing Lies and Thievery

By STEVEN M. DAVIDOFF

Published: June 20, 2012

After the financial crisis and the recent insider trading convictions of Raj Rajaratnam and Rajat Gupta, perhaps it is time to reconsider the plight of Jeffrey K. Skilling.

The former chief executive is serving a 24-year sentence arising from his conviction in a Houston trial of 19 counts after the stunning 2001 collapse of Enron. Until the financial crisis, Enron's bankruptcy was viewed as Exhibit A of corporate crime and executives run amok. After trial that lasted months, Mr. Skilling was convicted of securities fraud, among other crimes. Judge Sim Lake sentenced him to the low end of the recommended sentencing range after Mr. Skilling expressed remorse, asserting that he was ''innocent of these charges.''

The sentence was viewed as harsh by a few commentators at the time, but for those who were victimized by Enron's collapse and lost their jobs or life savings, Mr. Skilling got what he deserved.

The problem is that the case against the Enron executive was always an iffy one, and in light of recent events, Mr. Skilling's sentence appears increasingly unjustified.

The case against Mr. Skilling was so amorphous that prosecutors found it difficult at first to weave the various threads into a cogent narrative. In a 2007 article in The American Criminal Law Review, John C. Hueston, the lead trial lawyer for the federal government in the Skilling prosecution, wrote that the case against the Enron executive had ''fundamental weaknesses.''

It was complicated, difficult to explain and, perhaps most important, there was no smoking gun. Mr. Hueston wrote that he found his trial strategy after watching the Enron documentary ''The Smartest Guys in the Room.''

It was all about creating a ''simple but powerful trial narrative of lies and choices,'' he wrote. The narrative that Mr. Skilling lied and therefore deserved his punishment is a powerful one.

In a 2007 New Yorker article, Malcolm Gladwell controversially argued that much of the information that constituted this lie was already in the public domain, such that the problems of Enron were discoverable had someone only looked hard enough. Joe Nocera of The New York Times disputed Mr. Gladwell's thesis by picking up the lie motif, arguing that Mr. Skilling had ''lied to the investing public about the true condition of the company.'' He added, ''And no matter how you slice it, that's against the law.'' In this light, the charges against Mr. Skilling are both serious and curious. The significant ones concern shifting losses through reserve accounts, and other accounting tricks such as shifting reserves to meet earnings targets. These are the big lies. But Mr. Skilling was also convicted of falsely describing the wholesale energy business as a ''logistics'' company rather than a ''trading'' company. Does anyone think that during the Internet bubble and its haze, people would have noticed the difference between those labels?

As for the serious charges, the question is whether lying to your investors merits 24 years in prison, nearly a life sentence for a man who is now 58.

We'll never know the real truth of what Mr. Skilling did, though clearly he played fast and loose at Enron, perhaps creating a culture that encouraged criminal activity. But Mr. Hueston also acknowledged that Mr. Skilling did not behave like a criminal. He offered to invest millions in Enron as it struggled with illiquidity and returned as chief executive to try to help the company. This supports the counternarrative that Mr. Skilling was simply reckless and did not intend to hurt investors but simply didn't care enough to get these things right. His conviction was largely a result of people at Enron, like Enron's chief financial officer, Andrew S. Fastow, who did indeed steal from the company and then testified against Mr. Skilling for more lenient treatment.

A Houston jury heard these charges, though, and decided they were true.

But if Mr. Skilling did lie, as the jury found, that does not make his sentence right. It all boils down to whether there is a difference between lying - that is, telling an untruth - and stealing, or taking something that does not belong to you. Some may argue that they are equally bad, but the difference comes out in comparing Mr. Skilling with other recent financial criminals.

His crimes could be seen as different from the kind committed by Bernie Madoff and Raj Rajaratnam.

Mr. Madoff deliberately stole to benefit himself. He received a 150-year sentence for taking billions. Mr. Madoff's sentence was dictated by the federal sentencing guidelines, which specify sentences that increase rapidly depending on the size of the loss. In a multibillion-dollar public company, these numbers quickly escalate to life terms.

In Enron's case the loss was so great the guidelines recommended a minimum sentence of 24 years. Mr. Skilling was placed on the same footing as Mr. Madoff, even though in Mr. Skilling's case it can be argued that his lies about Enron's financial state were not as egregious as Mr. Madoff's outright theft.

The problem of culpability also arises with Mr. Rajaratnam and Mr. Gupta.

Mr. Rajaratnam acted deliberately, knowing what he was doing was illegal, and received a sentence of 11 years. Mr. Gupta also deliberately revealed inside information but is likely to receive a few years at most, and probably less.

The lower sentences for these two are because the guidelines view insider trading as a lesser crime, even though it is also a type of securities fraud. Because of this, Mr. Skilling is receiving a longer sentence than Mr. Rajaratnam and Mr. Gupta, even though their acts appear more deliberate. Even if Mr. Skilling is guilty, his statements were a misguided attempt to benefit Enron, something he admittedly profited from, but even now that attempt does not appear to have been a calculated scheme to steal from investors.

Mr. Skilling is clearly being penalized for not cooperating with prosecutors. All the other convicted Enron executives - including Mr. Fastow - are free. Mr. Skilling is also a victim of federal sentencing guidelines that put his misdeeds on a par with outright financial theft. Yet, perhaps lying is different from stealing in matters of securities fraud.

Mr. Skilling is still in jail awaiting resentencing after the Supreme Court overturned part of his conviction. Under the revised sentencing guidelines, he could receive the same sentence or possibly as little as 15 years, again the minimum for the large loss that occurred. Judge Lake may also depart from the guidelines and go lower.

It's very easy to go with the movie narrative that lies are not different from theft, enough to send someone to prison for a very long time. But Judge Lake may want to give the difference serious thought. The rest of Jeffrey Skilling's life depends on it.

This is a more complete version of the story than the one that appeared in print.